Hovnanian Enterprises, Inc.

Good morning and thank you for joining us today for Hovnanian Enterprises fiscal 2026 second quarter earnings conference call. An archive of the webcast will be available after the completion of the call and run for 12 months. This conference is being recorded for rebroadcast and all participants are currently in a listen-only mode. Management will make some opening remarks about the second quarter results and then open the line for questions. The company will also be webcasting a slide presentation along with the opening comments from management. The slides are available on the investor's page of the company's website at www.khov.com. Those listeners who would like to follow along should now log on to the website at I would like to turn the call over to Jeff O'Keefe, Vice President, Investor Relations. Jeff, please go ahead.

Thank you, DeeDee, and thank you all for participating in this morning's call to review the results for our second quarter. All statements in this conference call that are not historical facts should be considered as forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of the company to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Such forward-looking statements include, but are not limited to, statements related to the company's goals and expectations with respect to financial results for future financial periods. Although we believe that our plans, intentions, and expectations reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions, or expectations will be achieved. By their nature, forward-looking statements speak only as the date they are made, are not guarantees of future performance or results, and are subject to risks, uncertainties, and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements as a result of a variety of factors such as risks, uncertainties, and other factors are described in detail in the sections entitled Risk Factors and Management Discussion and Analysis, particularly the portion of MDMA entitled Safe Harbor Statement and our annual report on Form 10-K for the fiscal year ended October 31st, 2025, and subsequent filings with the Securities and Exchange Commission. Except as otherwise required by applicable security laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reasons. Joining me today are Ara Hovnanian, Chairman and CEO, Brad O'Connor, CFO, David Michelson, Vice President, Corporate Controller, Paul Eberle, Vice President, Finance and Treasurer. I'll now turn the call over to Ara.

Thanks, Jeff. Before we begin, let's take a moment to remember Ed Kangas, who passed this week. As our longest-serving independent director, chair of our audit committee, and lead independent director, Ed brought valued judgment, integrity, and steady guidance to our board and our management team. His leadership and his dedication to Hovnanian spanned many years as he joined our board shortly after retiring as chairman of Deloitte. Beyond as many professional contributions, he was also a trusted friend who will be deeply missed by everyone that knew him. The board of directors and everyone at the company extends our heartfelt condolences for his family. I'll also apologize in advance if my voice sounds raspy. I'm on the tail end of a nasty virus that hopefully will be gone soon. moving on to our results for the quarter i'll begin with a quick overview of our second quarter results and the progress we're making against our strategy in today's housing environment brad will then follow me with more details on our financial performance capital position and outlook before we open the floor for questions turning to slide five this Slide highlights our second quarter performance relative to the guidance we provided at the start of the period. Despite a continued choppy demand environment, we delivered solid execution coming in at or above nearly all of our targeted metrics, including a meaningful outperformance in our adjusted gross margin. Starting on the top line, we generated total revenues of $668 million, close to the midpoint of our projected range. Notably, our adjusted gross margin was 14.3% for the quarter, exceeding the upper end of our forecast and improving sequentially from 13.4% in the first quarter, which we believe marked the trough. We projected a trough in the first quarter with a rebound beginning in the second quarter and that scenario has come to fruition. Our SG&A came in at 12.6% right at the lower end and thus better end of what we expected. Our unconsolidated joint ventures contributed a million dollar loss this quarter, modestly below our expectations. This reflects startup costs ahead of our first deliveries in several joint venture communities, which is typical in the early stages of these projects. For the quarter, our adjusted EBITDA reached $41 million, coming in above our projected range. and our adjusted pre-tax income totaled $9 million, landing at the top end of our forecasted range. Stepping back, the results of this quarter reflect the core of our current approach, supporting affordability with targeted mortgage rate buy-downs to maintain sales pace while we work through older, lower-margin lots and quick move-in inventories. At the same time, we're transitioning toward newer communities where today's incentive environment is already built into the land underwriting, which we believe supports a path to better margins and returns over time. On slide six, you'll see this year's second quarter results along last year's second quarter. These comparisons are more challenging given the lower delivery volume, slower housing market, and higher incentives in the current market, but it also helps illustrate the progress we're making as the business transitions to a better margin profile. Total revenues declined 3% year over year, primarily because we delivered 12% fewer homes amid a more competitive selling environment. A land sale completed during the second quarter partially offset the impact of lower deliveries. Adjusted gross margin was lower than a year ago, largely due to the higher incentives used to support affordability and sustain sales pace. Importantly, these incentives are deliberate target levers in our current strategy, and again, as we efficiently work through older, lower margin lots and quick move-in inventory. Despite the year-over-year decline, gross margin improved sequentially in the second quarter. As I mentioned earlier, we believe the first quarter represented a trough. Looking ahead, we expect margins to benefit as we continue to open and deliver from newer communities where today's incentive environment was already incorporated in land underwriting. Assuming the market doesn't require meaningfully higher incentives, we believe this mixed shift supports a continued gradual improvement trend. During the second quarter, incentives represented 11.9% of our average sales price, with the majority tied to mortgage rate buy downs. Compared to the first quarter of 26, This represented a 70 basis point decline and marks the first time in nearly two years that incentive levels have decreased sequentially. We'll show more detail on the incentive trends in a few slides. Offsetting the year-over-year incentives, our construction costs decreased 2% year-over-year in the second quarter. Additionally, cycle times for single-family homes improved by six days to 138 calendar days versus the same quarter last year. SG&A increased modestly year over year, largely reflecting lower revenue. Even so, profitability for the quarter came in at the upper end of our guidance range. We continue to prioritize disciplined inventory management and a steady sales pace, positioning ourselves to capitalize on attractive land opportunities that we're finding in the marketplace. I'll repeat myself again, but we believe these new land purchases can drive stronger margins and improve returns, given that we're underwriting with heavy incentives today. Looking at the sales environment in slide seven, we had a slight year-over-year increase of 38 contracts in a home-selling environment that was impacted by decreasing consumer confidence. Without the incentives we're offering, we believe that our contracts would have decreased dramatically compared to year-ago levels due to ongoing market challenges and low consumer confidence. If you look at slide eight, you'll notice that the monthly community traffic through November and April mostly trended up with four of the six months showing strong year-over-year gains, while the last two months showed some softening among increased macro uncertainty related to the Iran war, April's rate of decline moderated versus March, which we view as a constructive signal. Our takeaway from this chart is that underlying demand and interest from consumers remains present, and as uncertainty eases, we believe the demand can translate to improved sales activity. As shown on slide 9, Contracts over the past 12 months have fluctuated month to month, reflecting a volatile housing market and shifts in consumer confidence. February's gain was the strongest year-over-year increase on the slide, followed by an 8% year-over-year decline in March, impacted by the start of the Iran war, and then a 3% increase in April. As of yesterday, our month-to-date contracts in May were up 12% versus the prior year, which would represent an increased trend if it holds through the end of the month. On slide 10, despite the impact of the war, you can see that second quarter contracts per community increased ever so slightly compared to last year. This year's 11.3 contracts per community was close to the average second quarter absorption pace since 97. On slide 11, we provide a closer look at monthly contracts per community comparing each month to the second in the second quarter to the same month last year. For February, the first month of the quarter, The sales pace was significantly higher than the same month last year, but the March sales pace was worse than a year ago. And then April was flat year over year. Summing up the slide in one word, the environment is choppy. If you refer to slide 12, We present contracts per community as if our quarter ended on March 31, which allows for a direct comparison with all of our peers that report contracts per community on a calendar quarter basis, which is most of them. Our 11.2 contracts per community sales pace ranks as the second highest among publicly traded homebuilders on this slide. As illustrated on slide 13, our contracts per community increased 4% year-over-year. We are one of only two builders on this slide with year-over-year increases for this metric. Again, our performance for these comparisons was based on an adjusted quarter ending in March for us, which allows us to have a direct comparison to our peers. Takeaway from these two slides is clear. Our focus on sales pace over price is delivering above average sales results and helping us work through older, less profitable communities more quickly. You turn to slide 14, you can see which tracks incentives. And if you look to the blue bar on the right, you can see what I mentioned earlier that incentives have finally begun to decline after three years of increases. The most dramatic jump happened at the start of 23 when incentives climbed from 3.9% in the fourth quarter of 22 to 7.4% in the first quarter of 23. Incentives have steadily increased over the past three years. While these higher incentives have put short-term pressure on our margins, they've been essential for maintaining a steady sales pace and allowing us to move our inventory. Even though we saw incentives decrease in the second quarter from the first quarter, it's still up 140 basis points compared to a year ago and higher by 890 basis points versus the full year in 22, which is the last full year of normal incentives before mortgage rates spiked and it began to affect our margins and our deliveries. To make homeownership more accessible for homebuyers, and again, moving through our inventory, we provided a variety of quick move-in homes across our communities. It gives buyers an opportunity to benefit from the incentives, lock their mortgage rate, and purchase a home faster and at a more affordable monthly cost. It's important to note that our recent land acquisitions, again, are underwritten to include these incentives while still meeting our return targets. As our new communities come online, again, I'll keep repeating this, we do expect to see stronger margins going forward. On slide 15, you'll see that at the end of the second quarter, we had 5.8 quick move-ins per community. This pretty much matches the previous quarter and highlights our progress in streamlining our inventory. By closely coordinating starts with our sales pace, we've reduced our QMI count and kept inventory levels balanced. QMIs are homes that are under construction the moment they begin or have completed that haven't yet been sold. Looking at slide 16. Our number of QMIs have dropped from 1,163 at the end of January of 25 to 731 at the end of April of 26, a 37% reduction in just over a year. In the second quarter, QMIs accounted for 68% of total sales. While this is down from the previous high of 79%, it's significantly higher than our historical average of about 40%. Meanwhile, sales of to-be-built homes, those constructed based on customers' orders, rose from 21% to 32%. If these patterns hold, we expect to see more to-be-built deliveries in the second half of 26 and into fiscal 27. as is typical, to-be-built margins in the second quarter were higher than our QMI margins. Having more to-be-built deliveries going forward will be beneficial to our gross margin and our overall profitability. With our current inventory of 731 quick move-in homes We're well positioned to satisfy existing home buyer demand. We'll continue to adjust our starts as needed, making sure we maintain the right balance. Enough QMIs to meet demand without overshooting. This strategy allows us to sign contracts and close on homes more quickly within the same quarter, leading to fewer homes left in backlog and a higher conversion rate from backlog to deliveries. In the second quarter of 26, 41% of the homes we delivered were both sold and closed in the same quarter. That's the highest percentage we've recorded since we began tracking this metric in 23. While this makes it a bit harder to predict next quarter results, it led to a backlog conversion rate of 85%, much higher than a historical average of 61% for the second quarter since 98. We continue to closely manage our QMIs for each quarter, making sure that the rate at which we start homes matches the rate at which we sell them. We try to sell the QMIs before they're finished. Over the past year, our finished QMIs decreased 55%. from 304 at the end of last year's second quarter to 137 finished QMI's at the end of the second quarter of 26. If you look at slide 17, you'll see that despite higher mortgage rates, and slower sales pace nationwide, we managed to increase prices, net prices, in 44% of our communities during the second quarter. This quarter, we raised prices or decreased incentives in a larger percentage of our communities than we have over the last two years. As the number of communities with price increases has increased, so is the geographic dispersion of those communities. To wrap up, we're actively managing our inventory to speed up sales of quick move-in homes, steadily clearing our lower margin land, and keeping our sales pace consistent. At the same time, we're positioning ourselves to capitalize on new land opportunities that promise better margins and higher returns. I'll now turn it over to Brad O'Connor with hopefully a less raspy voice than mine, our Chief Financial Officer. Take it away, Brad.

Thank you, Ara. Turning to slide 18, we ended the second quarter with $442 million in liquidity, well above our target range, even after spending $232 million on land and land development and $10 million on stock repurchases. This is the third quarter in a row that our liquidity was above $400 million, reflecting our disciplined approach to capital and land management. Turning to slide 19, as of April 30, 2026, our maturity ladder reflects the refinancing completed last fall. Today, except for our revolving credit facility, all outstanding debt is unsecured. This provides greater financial flexibility, further reduces risk, and supports our long-term plans. On slide 20, we highlight the progress we've made over the past few years in increasing equity and reducing debt. Over that time, equity has grown by $1.3 billion and debt has been reduced by $749 million. Net debt to capital is now 43.1%, a substantial improvement from 146.2% at the start of fiscal 2020. While we still have work to do, we remain on track for our 30% net debt to capital target. With $222 million in deferred tax assets, we do not expect to pay federal income taxes on approximately $700 million of future pre-tax earnings, which supports cash flow and capital flexibility. Turning to slide 21, this quarter we had 148 communities open for sale unchanged from last year. While the total count is steady, there's been meaningful activity over the past year as we opened 75 new communities and closed 75 others. The flat count reflects the balance of those actions, not a lack of portfolio refresh. Looking forward, our newer communities are positioned to outperform older ones, and we believe they will increasingly support improved margins and returns as they become a larger part of our delivery mix. Slide 22 details our land position. We ended the second quarter with 33,632 domestic controlled lots, equivalent to a six and a half year supply. Including joint ventures, we now control 36,621 lots. This excludes lots in our Saudi operation. Our total domestic lot count declined 21% year over year. reflecting our intentional approach to land acquisitions and our willingness to step away from opportunities that do not meet our underwriting standards. Our inventory of owned lots has also trended down, consistent with our continued shift toward a more land light model. Slide 23 shows the age or a lot position both owned and optioned, broken down by the year each lot was controlled. The number in each bar represents the total lots controlled in that year and the number below each bar indicates the percentage of incentives used on homes delivered during that year. This slide illustrates that by the second quarter of 26, slightly more than 22,000 or 66% of our owned and optioned lots were initially controlled after fiscal 2023 when we began underwriting land acquisitions assuming a meaningfully higher incentive environment. In the second quarter, 45% of our deliveries came from lots acquired in 2023 or earlier, which creates margin pressure because those lots were purchased assuming materially lower incentives, but less so than we experienced in previous quarters when more than 50% of our deliveries were from similarly aged lots. We're making a measured transition from older, lower margin lots to newer land opportunities that better fit today's incentive landscape. To help navigate current market conditions, we are also working constructively with certain land sellers where we have option agreements with the goal of appropriately sharing the pain and aligning on outcomes that work for both parties. Encouragingly, even with today's incentive environment, we continue to see attractive opportunities that meet our margin and IRR thresholds. On slide 24, you can see our land and development spending trends over the past six quarters along with the quarterly average for 2024. We scaled back land and development investment as we responded to changing market dynamics, with a modest uptick in the second quarter reflecting development activity to bring new communities online. Each acquisition is carefully evaluated, factoring in current pricing, incentives, construction costs, and sales velocity, so we can allocate capital thoughtfully and remain responsive to market conditions. Our focus remains on sustainable growth in both revenue and profitability, supported by disciplined underwriting, a land-light approach, and active capital management. As part of the updated strategy we discussed last quarter, we are concentrating on acquiring land for move-up homes in desirable A and B locations. We are also expanding our pursuit of active adult communities while reducing investment in lower-margin entry-level developments on the outskirts. Given the continued variability in the sales environment and the timing effects associated with quick moving home deliveries, we are providing financial guidance for the next quarter only. Our outlook assumes market conditions remain broadly stable with no major increases in mortgage rates, tariffs, inflation, cancellation rates, or construction cycle times. As a greater portion of our deliveries come from QMI's, quarterly results can be more sensitive to closing, timing, and mix. Our forecast includes ongoing use of mortgage rate buy-downs and similar incentives, and it does not include any changes to SG&A from Phantom stock expense tied to stock price movements from the $112.44 closing price at the end of the second quarter of fiscal 26. Slide 25 shows our guidance for the third quarter of fiscal 26. We expect total revenues between $650 million and $750 million. Adjusted gross margin is expected to be in the range of 14% to 15%. We expect SG&A as a percentage of total revenues to be between 12.5% and 13.5%, which remains above our long-term objective. We expect income from joint ventures to be between break-even and $10 million, and our guidance for adjusted EBITDA is between $30 million and $40 million. Our expectation for adjusted pre-tax income in the third quarter is between break-even and $10 million. While our third quarter profit outlook remains modest, we anticipate a rebound in adjusted pre-tax income during the fourth quarter of fiscal 26. The upcoming delivery of homes from our newer, higher-margin communities should further enhance results, primarily in the fourth quarter and beyond. On slide 26, we show that 86% of our lots are controlled via options, up from 45% in the second quarter of fiscal 2015, reflecting our strategic focus on land life. Looking at slide 27, we compare well to our peers in controlling land through options. In fact, we have the fourth highest percentage of option lots, placing us well above the industry median. On slide 28, we have the second highest inventory turnover rate among our peers, This is an important part of our strategy because it means we sell and replace our inventory more quickly than most competitors, demonstrating a more efficient use of our capital. Our strong inventory turnover is driven not just by our landline approach, but also by our ongoing efforts to streamline operations by increasing our use of land options and shortening the time from lot purchase to construction start, as well as speeding up construction completion we're able to turn our inventory more efficiently. On slide 29, we show that compared to our midsize peers, we have the highest adjusted EBIT return on investment at 15.9%. On slide 30, we show our price to book value compared to our peers. We are trading at about 20% below book value and below the median for all the peers shown on this slide. Given our high return on investment combined with our rapidly improving balance sheet, We believe our stock continues to be undervalued. I will now turn it back to Ara for some brief closing remarks.

Thanks, Brad. We're realistic about the environment we're operating in. As mortgage rates moved higher, incentives increased, margins compressed, and land values decreased accordingly, including land that we have. That's the reality of this part of the cycle. What matters is how you respond, and we are finding and underwriting new land that meets our IRR hurdles, even with today's higher incentive levels. We're being disciplined, selective, and patient without losing sight of our long-term returns. We're also respectful of the landholders that have optioned lots to us, sharing in the pain as we burn through older land at lower margins. Unfortunately, in the near term, that means accepting lower margins while the market works through this uncertainty. We're not sacrificing the future or making short-term decisions that compromise long-term value, even as the housing market slows amid broader geopolitical and macro pressures. I think about airlines in periods of elevated jet fuel prices like they are seeing today. They don't stop flying planes, but they manage through it, control what they can, and position themselves for stronger profitability when fuel prices normalize. And that's exactly what we're doing as a home builder, working through higher land and incentive costs while deliberately replacing older land with better underwritten land that supports materially higher margins over time. In today's environment, it's difficult to provide meaningful visibility beyond the next quarter. However, we believe we are well positioned for meaningful improvement in the fourth quarter, particularly in volume and gross margins as newer communities begin to deliver. And although demand may continue to fluctuate in the near term, as we've shown in some of our slides, we remain focused on execution and believe that focus can help us finish the year with solid momentum. We have a strong franchise and outstanding people and great liquidity. We focused on execution, managing inventory tightly, monetizing our QMIs, and accelerating the transition to newer, more profitable communities. We believe this disciplined approach positions us to emerge from this period stronger, more efficient, and better positioned to create value for our shareholders when conditions improve. That concludes our formal comments, and I'll be happy to turn it over for questions.

Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question comes from Steven Carlson of Cottonwood Capital. Your line is open.

Hi, guys. Thanks for taking the question. Just curious on your comments for an improved Q4, if you could elaborate on what you mean by that. Are you talking about, you know, year-over-year EBITDA improvement? Or is that... Is that something that might be delayed a little bit longer?

I'll try to elaborate. And again, I'll preface my comments with repeating the fact that it's very difficult to forecast beyond the current quarter and the next quarter. But having said that, as I mentioned, we anticipate higher volumes sequentially. That means higher delivery volume and higher revenues. And hopefully, if this trend continues and the market stays steady, we expect continued improvement in gross margins. So I don't want to get more specific than that, given the volatility that I've demonstrated through the slides earlier. But we're feeling optimistic that the lower margins and lower profit returns that we reported this quarter and we're projecting the third quarter will improve quite a bit in the fourth quarter.

Yeah, and the improvement is, as Aaron mentioned, sequential. We're not commenting on improvement over last year. We're commenting on improvement sequentially.

Okay, great. Thank you for clarifying that. And then just on the cash balance, I noticed a slight dip. I assume that was just from working capital use consistent with the working capital use I see last year, but there wasn't a cash flow statement. So I'm just curious.

It's actually typical for us to have our highest cash balance at year end. We tend to have our highest delivery volume in the fourth quarter. And then normally you'd actually see us, frankly, lower than this in the first and second quarter that we've been running this year because the current environment, we've not done as much land acquisition. There hasn't been as many deals that can underwrite in the current environment. So we actually have more liquidity and more cash than we typically would in the second quarter with liquidity over $400 million at the end of the second quarter.

But, yes, we've got a lot of working capital. I'll just elaborate just even further. It's not only higher than what is typical, as Brad mentioned, but it's way above our cash and liquidity targets. We'd love to have less cash, actually, which would mean that we would have invested more

uh in new land opportunities uh thankfully we are finding good land opportunities but uh just not quite enough to absorb all of our excess cash right now and just uh last question for me on that point uh any thoughts about um other than land opportunities plans to use use the cash or a you know i guess the only prepayable debt you have is really the preferreds but Any thoughts on use of the cash out of the ordinary?

You saw us opportunistically spend some cash in the quarter on stock repurchases. We still have available capacity under the Board approval for additional stock repurchases if we thought that was good use of the cash. We'd like to also continue to maintain this excess liquidity while waiting for better land deals to come along. We'd like to have some dry powder available to invest when the right time comes. But you might see us opportunistically take some stock repurchases. That would be difficult, as you point out. It's not really callable other than very expensive.

Okay. Thanks very much.

Thank you. And our next question comes from Alan Ratner of Zellman. Your line is open.

Hey, guys. Good morning. Thanks for all the detail and taking the questions. First, on the land comments you guys made, I think you kind of alluded to having some renegotiations with land sellers and land bankers, and you kind of alluded to sharing the pain a little bit. I'm just curious if you can you know, kind of quantify what percentage of your land book at this point have you gone back and renegotiated and actually gotten better pricing on? Is this something that's kind of still in the early innings, or have you actually, you know, made significant headway as far as your current portfolio of land? I'm just curious.

So, Alan, I'll make a couple comments to try to help answer the question. We have about, I think, 19% of our option lots are actually optioned with land bankers. A lot of the options are still with the original seller until they're going through the approval process. Therefore, we wouldn't renegotiate those until it was time to take them down and potentially either not move forward. So to your point, of the land banking volume, I couldn't give you a percentage in terms of how many we've gone back and renegotiated. But we go community by community where we're struggling with an individual community and For the most part, I would say land bankers have been helpful in deferrals, primarily deferrals, but there's been some assistance on price on some more struggling communities. Both sides really want to work it out and not have to exit. So far, I've had pretty good success with that.

Great. I appreciate that extra comment. Second question, just on the pricing environment, I'm curious, we've heard from some others that perhaps maybe mortgage rate buy downs aren't having quite the impact that they were having a couple of years ago when rates initially surged in terms of traffic and even getting buyers off the sidelines. We've seen some other builders kind of pivot more towards base price adjustments. You know, first is more of a housekeeping question. When you give those incentive numbers, is that an all in kind of price adjustment number incentives plus base price or is that only incentives? And then the follow up to that is, have you also begun to maybe pivot more towards base price adjustments versus incentives? Thank you.

I'd say it's really situational. At this point, you heard a comment from other builders that mortgage rates are not necessarily driving customers. The reality is the lack of confidence with everything that's going on globally is really the driving factor. So whether it's incentives, buy-downs, base price reductions, customers are just a little more hesitant at the moment. We deal with every single community individually. In some cases, mortgage rate buy-downs are important, depending on what our competitors are doing and how customers are reacting. In some cases, a little mortgage rate buy-down may be appropriate. In other cases, base price reductions. You name it, we will customize it to the situation at hand.

But I think, Alan, to my knowledge, we haven't seen a significant change in the usage of mortgage rate buy-downs. And when I say that, I mean any level of mortgage rate buy-downs. So some customers may only take a smaller buy-down along with a different incentive. So they might just buy it down to five and a half or something like that. But there's still a significant number of customers that are doing some form of rate buy-down in their use of our incentives.

Got it. And just the other part of my question, just wanted to confirm, the incentive numbers that you gave, percentage of, I guess, original price, would that also include if you were to reduce base price? Is that embedded within that percentage?

I don't think it is, but frankly, we haven't seen widespread base price reductions. It's been very, very isolated.

Yeah, I agree with that. It's not in the number, but it would not be meaningful because there hasn't been very many places we've done that.

Okay, got it. So I shouldn't interpret then that sequential decline that you saw an incentive as a shift towards more coming at a base price. No. Okay, perfect. Great. Thanks a lot, guys. I appreciate it.

Yep. Thank you.

And our next question comes from Alex Barron of Housing Research. Senator, your line is open.

Good morning, gentlemen. As far as the improvement in incentives, is that because your competitors are less aggressive at this time than they used to be and therefore you don't have to try to match what they're doing or is it just, you know, buyers are where you don't have to offer as much because buyers are feeling just more confident regardless of what competitors are doing.

Alex, I'd say it's multi-pronged. A lot of it is driven by the fact that we've got a reduced amount of QMIs. We felt like we got a little ahead of ourselves with QMIs, and we were getting more aggressive to move through those. As we brought the level of QMIs down, we actually have about less than one finished QMI per community right now. uh we feel like we can be less aggressive in our incentives that and you know mortgage rates uh and the buy down cost varies week to week and uh competitors uh promotions vary week to week so there are many reasons but uh i'd say uh a big chunk of it is uh that we have fewer QMI's and feel less motivated to increase incentives to move through them.

Okay. Yeah, that was going to be my next question. For perspective, what was your level of finished unsold specs maybe two quarters ago or a year ago versus where you are today?

We have it on a slide. We were at 9.3 was our peak, a 9.3 QMI's per community in January of 25, and we're at 5.8 today. So not quite half, but quite a bit less. And it was 8.6 exactly one year ago. So, you know, significant reductions from 8.6 a year ago to 5.8 now.

And Alex, if you were focused on finished QMIs, we peaked at the fourth quarter at about two and a half per community. And as Eric mentioned, we're close to about one right now. So significant improvement in our finished reduction in our finished QMIs, which is really where the heavier incentives would be, which Jim further demonstrates his point.

Yeah, that's great to hear. Also, as far as your joint ventures and the Saudi Arabia operation, it seems you guys had a slight loss in the joint venture, so I was wondering what drove that and also saw zero activity in Saudi Arabia. So is that done, or are you guys going to start something in the future there?

Yeah, two comments. The JV income loss for the quarter, the loss for the quarter, is not related to Saudi at all. It's no longer a joint venture, just to be clear. And the reason there was a small loss is we've just ramped up a couple of new joint ventures and had finished out some of our older ones over the last previous couple quarters. So you're seeing a startup phase of a couple of the new ones. They'll start to deliver and later on this year, and as we mentioned, we expect them to have a small amount of income in the third quarter from JVs, and then it should grow from there. With respect to the Saudi operation, we do have activity. We have a couple of communities that are selling, but not yet delivering. So we're expecting deliveries from the Saudi operations in the second half, primarily starting, you'll start to really see it in the fourth quarter of this year.

Overall, as you might expect, first of all, our Saudi operation is really minute in the overall scope. I mean, it's a very small investment and relatively small number of deliveries. But having said that, as you might imagine, given the world situation in the Middle East right now, there is a lot more hesitancy there on the part of consumers than there is here. But fortunately, we're in a pretty good position with minimal investment, and we're confident that market will improve as soon as the current crisis settles down a bit.

Okay. Well, best of luck. Thank you for all the details. Thank you.

Thank you.

And our next question comes from Jay McCandless of Citizens Bank. Your line is open.

Hey, good morning, guys. So my first question, y'all threw out a stat about dirt starts being 32% this quarter, I think, versus 21%. Was that 32% of orders or closings? And I guess what's the max you think you could get dirt starts with the current community base?

It was 32% of sales for the quarter. Yeah, just to be clear. And we're not targeting, you know, a number, so to speak. But obviously, you know, we like to sell 2B built homes when we can in the right communities. Margins tend to be better, as we've commented on. And we have seen it gradually going up over the last couple quarters. Historically, we would have about 60% of our sales be 2B built, you know, prior to the mortgage rate increase that occurred. and that really pushed us toward QMIs. So I think over the long run, I would expect us to continue to migrate back towards that kind of number, but how long that will take remains to be seen. As long as customers still value quick-moving homes, we're going to have to still offer that on some basis.

I will add that most of our communities offer both QMIs and to-be-builts. So it's not necessarily something that we are driving. Customers often have the option in the overwhelming majority of our communities. So it just so happens that we had more to-be-built interest than QMI interest. The impact is significant. It's the QMI's that can deliver typically within 60 or 90 days where customers are looking for mortgage rate incentives, obviously on to be built. We don't offer anything like that in mortgage incentives, so it is helpful to our margins, and we'll see where the market goes. In general, we are shifting away from the most affordable entry-level housing, so that would typically imply—and those are the buyers, by the way, that are most— dependent on buy downs in order to qualify for the mortgages. So we'd expect, but we'll see, that as we continue to shift away from that segment of customer at the tertiary markets, that it would be natural that we'd shift to a little less incentive with mortgage rate buy downs.

Okay, thank you. The second question I had on land sales, you've had Pretty good sales and profits from that the last two quarters. Is that a run rate we should expect going forward or how should we think about land sales for the rest of the year?

No, it's really an opportunistic thing when We see an opportunity to make as much profit flipping a piece of property as building a piece of property, depending on a division's capacity or need for deliveries and volume for their overhead. We'll take advantage of that. So it's not something that's planned or regular. It just comes up from time to time, and we don't have anything specific planned for the next quarter.

Okay. And then the next question I had kind of, if you look at slide 23 and you look at the lots that are 23 and 24 vintage, that's almost 45% of your controlled lots. But those are also the ones that I would assume are probably one of the largest drag on gross margins. I mean, how quickly can you work through, I think it's almost 16,000 lots. How quickly do you think you guys could work through that? Is that the driver for community count right now? I guess my question is, can you not get rid of those lots because those are the communities about to come online, even though they're the ones that are still a margin drag?

I think the first thing, Jay, to keep in mind, because you're grabbing 23 and 24 lots. together and if you look at the below the bars you'll see that in 23 we averaged for the year 7.9 percent incentive and 24 was 8.1 percent and in 23 when we did my suspicions I don't have it off the top of my head but we probably started the year much lower and finished the year much higher and averaged 7.9 and then there it kind of was more stable in 24 and 8 percent my point being that those lots are actually have, were underwritten at 80% incentives. Now we're now running around 12, but we're still much closer with those vintage lots than we are if you go back and look at the lots from 21 and 22. So the point that we're trying to make is it's a good thing as we get into the 23 and especially 24 vintage lots because we were underwriting it with higher incentives and therefore expect that to all else being equal, expect that to improve our margins from where they are today as those communities begin to deliver.

That's helpful context. Thank you, Brad. The other thing we'll mention is Lot vintage certainly has a lot to do with margins, but geographic mix has even more to do with margins, and that's really critical. The smile states that have typically performed very well are certainly having a more challenging time today. Florida, Texas, the West Coast. and our East Coast markets are certainly doing far, far better. So the geographic mix is probably more important than the vintage.

Okay, great. Thank you. And then just the last question for me, any idea or outlook on community count for the rest of the year and into 27?

I think what we would say on that is We've been relatively flat year over year, but we do expect community count to grow later this year, early into 27. We have continued to have challenges with getting communities open timely for various reasons. That's definitely been a challenge. But we do have some communities coming online we would expect growth towards the end of this year.

I'm sure you've heard the same thing from our peers. The whole industry is having a challenging time with land development timing and new community openings. But it's also challenging because we do a re-underwriting of properties that were under contract before we close on them. So there may be communities we're planning to open, but as we get very close to taking down the land, if the economics don't work, there are times when we either renegotiate with the seller or don't move forward, as you see from impairments and walkaways that we've had and all of our industry have had. But on the whole, we try to be good partners and work through some of the difficult land transactions with our partners. We value relationships. We're long-term players, and we don't want to be bad partners with everyone. Understood. Thanks, guys.

Appreciate it.

Thank you. I show no further questions at this time. I'd like to turn it back to Ara Havnanian for closing remarks.

Thanks very much. We, like all of our peers, and I'm sure like all of you that invest in our space, are looking forward to stability worldwide and in the US. And we know there's demand out there. Our website interest and traffic at our communities is very high. Communities are, I mean, customers are engaged. They're just hesitant to pull the trigger at volumes that we'd consider normal and at margins that we consider normal. But this too shall pass. It's part of the quintessential cyclicality of housing. And we look forward to a bright future, particularly as we bring some of our newer land parcels to market. Thank you very much.

This concludes today's conference call. Thank you for participating and you may now disconnect.